Tagged: Food Inflation

India on Monday offered incentives to some exporters to help them tide over an uncertain and “fragile” global economic recovery, but said fiscal consolidation might not allow continued support in the future. Trade Minister Anand Sharma, who unveiled the country’s annual foreign trade policy, also said the government would continue to restrict exports of certain food items as it deals with double-digit food inflation. India’s exports, which make about one-fifth of its economy, returned to double digit growth in November after last year’s prolonged slump. However, the pace of growth in the sector slowed to an annual 13.2 percent in July from 30 percent a month ago, reflecting a dampening base effect and demand contraction in Europe and the United States, with the government forecasting an uncertain outlook for the sector over the next six months.

“There is still a shroud of uncertainty over the fragile nature of global economic recovery. Even as global economic rebalancing is proceeding apace, it is not going to be an easy patch for our exporters,” Sharma said. “We also have to be conscious of the need for and the inevitability of fiscal consolidation,” he said. “Suffice it to note that the level of resources available today may not be available in the future.” India has been saddled with a high fiscal deficit and aims to cut the deficit to 4.1 percent of GDP in 2012/13 from 5.5 percent projected for this fiscal year. The need for fiscal prudence stopped Sharma from providing incentives for all export-oriented sectors and instead focus on labour-intense industries and those which are important for capacity expansion in the economy.

As part of the new incentives, the government will allow duty free imports of capital goods until end-March 2012 and provide an interest subsidy of 2 percent to textiles, leather and jute industries for 2010/11. It will also continue to refund taxes paid as custom duties until end-June 2011. Sharma said the additional export incentives would cost the government $214 million in the current financial year. Continue reading →

India needs to invest in technology to cultivate dry areas and boost farm production lagging at the slowest pace of growth in five years, Prime Minister Manmohan Singh said in his Independence Day speech.The South Asian nation wants to boost agricultural growth to 4 percent, Singh said today. Farm output in Asia’s third- largest economy grew 0.2 percent in the year ended March 31, according to government data. Increasing farm output is crucial for Singh’s government to meet its target of 8.5 percent economic growth. Agriculture accounts for about 18 percent of the $1.3 trillion economy and directly employs 235 million people, almost equal to the population of Indonesia. “Any hopes of achieving higher overall economic growth without a robust farm sector growth are myopic,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. “The prime minister is moving in the right direction with the focus deepening on the sector.

The government is probably realizing that crop yield hasn’t reached its potential.” Technology to farm dry areas and reduce dependence on the annual monsoons will also help the government keep inflation under control, Mumbai-based Shankar said in a telephone interview. Reserve Bank of India Governor Duvvuri Subbarao on July 27 raised the forecast for economic growth. India’s economy may accelerate at 8.5 percent in this fiscal year, faster than the previous estimate of 8 percent, the bank said.

Food Inflation

India’s food inflationslowed to 9.53 percent in July, a 13-month low and down from 21 percent in November, as the country last month got more monsoon rains than forecast, aiding sowing of lentils and rice. “Our government wants a food safety net in which no citizen of ours would go hungry,”

India’s proposed food security act could nearly double to as much as $23 billion the food subsidy bill from targeted levels, Farm Minister Sharad Pawar suggested on Friday, potentially spooking plans to cut the fiscal deficit. The proposal, to provide cheap foodgrains to the poor, has been backed by the ruling Congress party’s powerful chief Sonia Gandhi. The government went back to the drawing board after she suggested the entitlements under the law be widened.

Pawar told parliament the cost of the new welfare scheme could be between 767.2 billion rupees ($16.5 billion) and 1.07 trillion rupees ($23 billion). This compares with the 555.78 billion budget target for food subsidies in 2010/11 fiscal year. The range represents two proposals for the bill, one offering 25 kg of grains each month to poor households and the other giving 35 kg.

Prime Minister Manmohan Singh on Saturday reiterated his prediction headline inflation would ease to 6 percent by December, a forecast more optimistic than that delivered by his economic advisers a day before. The prime minister’s Economic Advisory Council had said inflation would be at 7-8 percent by the year-end, compared with 10.55 percent in June, and its chairman recommended strong monetary action to tame runaway prices. Singh’s statement comes amid a growing divergence between the government and the central bank on the need for monetary tightening to cool inflation that has been in double digits for five straight months.

New Delhi puts high food prices as the cause and argues normal monsoon rains would cool inflation, while the Reserve Bank of India (RBI) says demand-side factors will continue to keep up pressure on inflation. On Saturday, Singh backed his officials’ view. "The present high rate of inflation is mainly due to food price inflation," he told a conference of top federal and state policymakers gathered to assess the country’s development plans. "The government has taken a number of steps to curb inflation. With a normal monsoon, which is the expectation at present, the rate of inflation will abate in the second half of the year."

India’s food inflation eased, but fuel inflation accelerated in late June and a recent hike in fuel prices kept the case for the Reserve Bank of India (RBI) to top up its last Friday’s rate hike when it reviews policy on July 27. The second straight weekly fall in food inflation would give little cheer to policymakers as the recent fuel price hike could push up by over 1 percentage point what is already the highest headline inflation level among the G20 major economies. Data released on Thursday showed the food price index rose an annual 12.63 percent in the year to June 26, slower than the previous week’s 12.92 percent, largely as prices in the year-ago period were high. The fuel price index went up by 18.02 percent during the period, compared with the previous week’s 12.90 percent. The index will see another jump in its next reading, with the government having raised fuel prices from June 26.

The primary articles index rose by 16.08 percent, compared with 14.75 percent in the previous week. Following the fuel price decision, the RBI lifted its key rates earlier-than-expected by 25 basis points, the third hike so far this year, as it struggles to bring down inflation that a senior government official said could hit 11 percent in June. "When the full pass-through of the hike comes, there will be more of an impact on the prices of commodities," N.R. Bhanumurthy, an economist with New Delhi-based think tank National Institute of Public Finance and Policy said. "I would expect another 25 basis points hike in the July 27 review and after that one more round of an off-cycle hike."

India’s annual monsoon, crucial for a rebound in farm output after last year’s drought, has rapidly advanced to cover the entire country, boosting crop sowing and likely tempering food price inflation. The weather office has forecast widespread rains in the cane- and rice-growing regions in the north and in the oilseed-growing areas in the central and western parts. Rainfall was 16 percent below normal in June, when the monsoon did not advance beyond central India for two weeks, but heavy showers in the past week have narrowed the deficit to 13 percent. "The monsoon has covered the entire country by about nine days ahead of schedule," said B.P. Yadav, director at the India Meteorological Department.

The revival of monsoon rains, the main source of water for 60 percent Indian farms, will lift soybean and groundnut crops in the world’s top vegetable oils importer and help the cane crop in the Uttar Pradesh state, which produces half the cane in the world’s top sugar consumer. The weather office expects total June-September rainfall to be normal despite the June deficit. But forecasters and analysts said the rapid progress of rains in recent days was not too significant; because last year the monsoon had covered the entire country by July 3 and India still face the worst drought in 37 years. "It’s too early to say that the entire season will have a normal monsoon," said D.K. Joshi, principal economist at CRISIL, a rating agency. "The development is positive and it will at least curb inflationary expectations on food," he said.

INFLATION

Last year’s draught has led to a surge in food prices, with the headline inflation rate hitting above 10 percent in May and prompting the central bank to raise interest rates by 25 basis points in an inter-meeting move on Friday. High inflation has also triggered a series of protests including a successful national strike against high prices that

India’s winter-sown crop prospects are "very encouraging", but the country needs to pay farmers a good price for their produce to boost output further, Prime Minister Manmohan Singh told parliament on Friday. A good harvest is likely to bring down food inflation, which accelerated to nearly 18 percent in late February from a year ago, and also put pressure on the government to export wheat and rice as official agencies do not have enough storage space.

The government, facing mounting criticism for rising food prices, is struggling to meet conflicting aims of controlling food inflation and trying to please farmers by paying them attractive prices. Singh said the government would take all practical measures to bring down food prices. He also said the economy, Asia’s third largest, would grow by at least 8 percent in the financial year that begins on April 1, after expanding 7.2-7.5 percent in 2009/10.